Impact of Fed's Expected Rate Hike May Be Muted — Market Talk

1034 ET - The markets now expect the Fed to raise rates by 25 basis points next week, but the impact of the hike may be muted, LPL Financial's Jeffrey Roach says in a note. A widening share of economic activity is less sensitive to interest rates, similar to what was seen during the Fed's hiking cycle in 2022 and 2023, the economist says. Demand could remain resilient despite a tighter policy due to surging AI investment and continued spending on travel from affluent consumers, Roach says. He expects nominal economic growth will remain higher than 6% in the coming quarters. ([email protected])1027 ET - Major cryptocurrencies are climbing following a firm August CPI. Bitcoin rises 2% to $78,801, after traders rejected the $80k mark, which analysts see as a short-term lid. "After a 24% two-week rally, price stalled as it ran into a cluster of on-chain and technical resistance," say analysts with CryptoQuant in a note. "A supply wall sits directly overhead at $77.1k-$80.2k." Ethereum rises 5.7% to $2,602, XRP is up 3.8% to $1.41, and solana climbs 4.4% to $104.41. ([email protected])0959 ET - The European Central Bank remains the largest single investor in the euro investment-grade credit market, LBBW's Matthias Schell says in a note. The size of ECB's corporate bond holdings has reduced gradually over the past three years after it stopped purchasing corporate bonds in 2023. The holdings have also declined as bonds mature. As at the end of August, the ECB held 253.6 billion euros in euro IG bonds bought during previous periods of quantitative easing, down from a peak of 390 billion euros in 2023, Schell says. ([email protected])0946 ET - The U.S. 2-year yield is sensitive to expectations for short-term interest rates. The core CPI, which excludes volatile food and energy prices came in hotter than analysts expected in August, rising 0.3% month-over-month versus the expectation of 0.2%. The U.S. 2-year yield rose to 4.598%. Odds for a rate hike at next week's Fed meeting also climbed to nearly 90%. A month ago, those odds were nearly split.([email protected])0945 ET - The August CPI showing inflation rising 3.4% year-over-year, and the core up 2.4%, strengthens the case for a Fed rate hike next week says to Karl Schamotta, Chief Market Strategist at Corpay in a note. "In our view, the balance of risks facing the Fed now favors raising rates. With core price growth showing signs of accelerating, oil benchmarks up more than 78% this year, tariffs rising once again, Washington floating fiscal giveaways, and artificial intelligence investment still flowing, there's little to suggest that inflation pressures are set to ease in the months ahead, giving officials little choice but to take action now." Futures traders seem to agree with the CME's FedWatch Tool now showing an 85% likelihood that the Fed will raise rates by a quarter-point. ([email protected])0933 ET - Sterling could fall versus the euro if Bank of England Governor Andrew Bailey pushes against markets' expectations of BOE interest-rate rises during its policy decision on Thursday, ING strategists say in a note. Investors currently fully price in one-quarter point BOE rate rise in 2026, and three rate increases by March 2027, LSEG data show. Euro is last down 0.1% at 0.8583 pounds. "We have a 0.86 euro/sterling forecast for end-September and a 0.87 view for year-end on the assumption that some of that aggressive BOE tightening is priced out," ING strategists say. ([email protected])0930 ET - Now that economists have the PPI and CPI print in hand, they can start calculating their forecasts for PCE, the Fed's preferred inflation gauge. Capital Economics now estimates the PCE deflator rose by 0.27% month-over-month in August. Some economists estimated that upcoming methodological changes at the BEA, which publishes PCE, could relieve some pressure on the core PCE deflator. But, Capital's Stephen Brown says that projection is unlikely to be affected much by the revisions to portfolio management and software & accessories price calculations. ([email protected])0914 ET - The upside surprise to core CPI in August means the Fed looks set to hike next week, according to a note from Capital Economics. Core CPI came in at 0.3% month-over-month, while economists polled by WSJ expected an increase of 0.2%. Capital Economics says that in analyzing the CPI components that feed into the PCE calculation, the monthly estimate implies that annual core PCE inflation would rise from 3.3% in July to 3.4%. "In short, core PCE inflation is moving in the wrong direction and that should be enough for the centrists on the FOMC such as Governor Christopher Waller to support a hike next week," the note says. The PCE is the Fed's preferred method of measuring inflation. ([email protected])0857 ET - The dollar rises to a one-week high against a basket of currencies after inflation data showed annual CPI held steady at 3.4% in August, in line with expectations. Following last week's strong U.S. jobs data, the numbers could increase prospects of the Federal Reserve hiking interest rates, possibly as soon as next week. U.S. money markets price an 82.5% probability of a hike next week, versus around 68% beforehand, LSEG data show. "Policymakers may have been willing to look through an oil-driven inflation shock if there were clearer signs of economic weakness, but robust job creation and persistent wage pressures leave little room for complacency," says Wealth Club's Isaac Stell in a note. The DXY dollar index rises to a high of 99.368. ([email protected])0854 ET - U.S. consumer price inflation data--with both year-on-year headline and core inflation in line with expectations--have done nothing to change Schroders' view that the Federal Reserve is behind the curve, David Rees, head of global economics says. "While headline inflation is being pushed around by rising energy prices, the bigger picture is that the economy is running hot and domestically generated inflation is grinding higher," he says. Rees expects the market to continue questioning the Fed's credibility until it starts raising interest rates, and the Treasury's willingness or ability to cap yields. "The Fed can either choose a rate hike next week and a controlled rise in short term U.S. borrowing costs, or do nothing and risk an uncontrolled rise in long-term U.S. borrowing costs." ([email protected])0853 ET - U.S. Treasury yields are largely steady following the August CPI. Prior to the report the U.S. 10-Year Treasury yield was hovering around 4.96%, it now stands around 4.95%. The U.S. 2-year yield is hovering around 4.60%. The CPI report came in at 3.4% year-over-year, which was in line with the WSJ consensus. ([email protected])0804 ET - The cost of insuring Saudi Arabia's sovereign debt against default edges higher after Houthi militants captured a Red Sea port late Thursday, an important route for Saudi's oil exports. The militants earlier this week attacked energy facilities in Saudi Arabia, raising concerns about the spread of the Middle East conflict. Saudi Arabia's 5-year sovereign credit default swaps climb 1 basis point to 59bps, the highest in three weeks, S&P Global Market Intelligence data show. ([email protected])